IMF published its staff report and selected issues report in the context of 2017 Article IV consultation with Brazil. These reports assess the Brazilian financial sector in the backdrop of a deep recession. Directors observed that the financial sector has remained sound despite the severe stresses. To make the system more robust, they encouraged actions to further strengthen financial safety nets through enhanced monitoring and an improved crisis management framework.
The staff report highlights that the health of the banking sector has improved. To limit increases in nonperforming loans, banks have continued renegotiating the terms of loans and writing off delinquent loans. Capital ratios have increased on the back of a decline in private banks’ risk-weighted assets and higher unrealized gains on fixed income securities. However, capital ratios of public banks, much lower than those of private banks, continued declining because of higher Basel III deductions. Liquidity has also improved as withdrawals of saving deposits stopped and banks’ holdings of liquid assets increased. A reform of the bankruptcy framework is underway; its early conclusion would help expedite the bankruptcy process and reduce creditors’ default losses, which should in turn facilitate the financing of capital investment. Overall, the banking sector has weathered the recession well and ongoing efforts to bolster its resilience should continue.
Banking sector soundness indicators improved in 2016 as shocks to funding dissipated, interest margins rose, and non-performing loans moderated. From a structural perspective, it would be important to conclude actions aimed at strengthening financial safety nets further by enhancing the Central Bank’s ability to provide emergency liquidity assistance and implementing the new resolution regime for banks. These steps would strengthen the authorities’ capacity to deal with liquidity and solvency shocks. As recommended in the previous Financial Sector Assessment Program (FSAP), a committee with an explicit mandate for systemic risk monitoring should be established and a mandate should be given to a separate entity to set up a crisis management framework. Banks that consistently fail the stress tests performed by the Central Bank should be required to raise additional capital or, if they are state-owned, they should be recapitalized or allowed to retain profits to boost their capital.
The selected issues report discusses several issues such as the Brazil’s business environment and external competitiveness, distributional effects of the pension reform, regional inequalities, and existing issues related to interest rates and inflation in the country.
Keywords: Americas, Brazil, Banking, Article IV, NPL, Basel III, IMF, FSAP
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